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When are adaptive expectations rational? A generalization

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  • Shepherd, Ben

Abstract

This note presents a simple generalization of the adaptive expectations mechanism in which the learning parameter is time variant. It is shown that expectations generated in this way are rational in the sense of producing minimum mean squared forecast errors for a broad class of time series models, namely any process that can be written in linear state space form.

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  • Shepherd, Ben, 2011. "When are adaptive expectations rational? A generalization," MPRA Paper 34644, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:34644
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    References listed on IDEAS

    as
    1. M. Nerlove & S. Wage, 1964. "On the Optimality of Adaptive Forecasting," Management Science, INFORMS, vol. 10(2), pages 207-224, January.
    2. repec:adr:anecst:y:2002:i:67-68:p:05 is not listed on IDEAS
    3. Durbin, James & Koopman, Siem Jan, 2012. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, edition 2, number 9780199641178.
    4. Cuthbertson, Keith, 1988. "Expectations, Learning and the Kalman Filter," The Manchester School of Economic & Social Studies, University of Manchester, vol. 56(3), pages 223-246, September.
    5. H. Theil & S. Wage, 1964. "Some Observations on Adaptive Forecasting," Management Science, INFORMS, vol. 10(2), pages 198-206, January.
    6. Roger E. A. Farmer, 2002. "Why Does Data Reject the Lucas Critique," Annals of Economics and Statistics, GENES, issue 67-68, pages 111-129.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Sorge, Marco M., 2013. "Generalized adaptive expectations revisited," Economics Letters, Elsevier, vol. 120(2), pages 203-205.
    2. Dave, Chetan & Sorge, Marco, 2023. "Fat Tailed DSGE Models: A Survey and New Results," Working Papers 2023-3, University of Alberta, Department of Economics.
    3. Dave, Chetan & Sorge, Marco M., 2020. "Sunspot-driven fat tails: A note," Economics Letters, Elsevier, vol. 193(C).
    4. Homburg, Stefan, 2017. "A Study in Monetary Macroeconomics," OUP Catalogue, Oxford University Press, number 9780198807537.
    5. Šimpach Ondřej & Langhamrová Jitka, 2013. "Forecasting Future Salaries in the Czech Republic Using Stochastic Modelling," Business Systems Research, Sciendo, vol. 4(2), pages 4-16, December.
    6. Findley, T. Scott, 2015. "Hyperbolic memory discounting and the political business cycle," European Journal of Political Economy, Elsevier, vol. 40(PB), pages 345-359.

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    More about this item

    Keywords

    Adaptive Expectations; Rational Expectations; Kalman Filter;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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